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End Of Cheap Fossil Fuels Could Have More Severe Consequences Than Thought

The characteristic feeling of the post-2008 world has been one of anxiety. Occasionally, that anxiety breaks out into fear as it did in the last two weeks when stock markets around the world swooned and middle class and wealthy investors had a sudden visitation from Pan, the god from whose name we get the word "panic." Pan's appearance is yet another reminder that the relative stability of the globe from the end of World War II right up until 2008 is over. We are in uncharted waters.

Here is the crux of the matter as expressed in a piece which I wrote last year:

The relentless, if zigzag, rise in financial markets for the past 150 years has been sustained by cheap fossil fuels and a benign climate. We cannot count on either from here on out....

Another thing we cannot necessarily count on is the remarkable geopolitical stability that the world experienced for two long stretches during the fossil fuel age. The first one lasted from the end of the Napoleonic Wars in 1815 to the beginning of World War I in 1914 (interrupted only by the brief Franco-Prussian War). The second lasted from the end of World War II in 1945 until now.

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Following the withdrawal of U.S. military forces from Iraq, the Middle East has experienced increasing chaos devolving into a civil war in Syria; the rapid success of forces calling themselves the Islamic State of Iraq and Syria which are busily reshaping the borders of those two countries; and now the renewed chaos in Libya. We must add to this the Russian-Ukranian conflict. It is no accident that all of these conflicts are related to oil and natural gas.

As I view the current world landscape, I am reminded of two movies (which I've written about before) that I think capture the Zeitgeist: Melancholia and Take Shelter. In both the protagonists increasingly sense that something is terribly wrong, but can't quite put their finger on it. Everyone around them thinks they are ill or crazy. But for both protagonists, their anxiety comes from an inner vision that stems not from mere psychic disturbances, but rather from alarming real-world circumstances that are about to break into the open.

In a sense, these two characters represent those of us who cannot repress the pervasive anxiety of our times and who seek not merely to alleviate it, but rather to face it--to find out its origins and address its causes.

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And here we return to the god Pan, mentioned at the outset. It is fitting that this god of nature--of shepherds, flocks, and wild places--should also in our age be associated with the panic we feel. For it is nature itself which is weighing on our economy in the form of climate change and fossil fuel depletion. As California--the seventh largest economy in the world behind France--burns in the heat of a multi-year drought, the grim consequences of our poor stewardship are becoming apparent. The images of fiery forests and dust-dry fields command our attention.

But hidden from the view of most is the role that increasingly expensive energy has played since the beginning of this century in slowing economic growth. The shorthand way of understanding this is that in the last century we extracted all the easy-to-get fossil fuels. Now we are going after the hard-to-get remainder which are costly to extract. That takes resources away from the energy-consuming part of the economy and creates a drag on economic growth. Hence, a dramatically slower economy in 2015 after four years of record or near record average daily prices for the most critical fossil fuel, oil. (The recent drop in oil prices is primarily a reflection of slowing demand that comes from a slowing economy.)

The financial industry through the media has intervened forcefully during the recent stock market sell-off to tell us all not to panic. These corrections are normal, they say, and long-term investors--that is, virtually everyone except Wall Street--should ignore them. What the industry and the media do not tell us is that these are not normal times.

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Circumstances have changed dramatically. The evidence is there if only we have eyes to see it. Interest rates in much of the world are still stuck at or near zero seven years after the last worldwide downturn. How will the world's central banks stimulate the economy after the next inevitable recession? By lowering interests that are already at zero? In the post-World War II paradigm, rates would be at much higher levels today, say four or five percent, and economic growth would be much faster.

Annual world economic growth from 1961 through 2000 according to the World Bank was 3.8 percent per year. From 2000 to 2013, an era of increasingly expensive energy, it slowed to 2.4 percent. From the initial spurt of 4.1 percent growth in 2010 (after a contraction of 2.1 percent in 2009), growth settled down to 2.3 percent in 2012 and 2013, slightly below the recent average. This is despite unprecedented efforts to stimulate the world economy through large increases in government spending and record low interest rates.


And, as mentioned above, the geopolitical stability that has been the backdrop to the pervasive buy-and-hold investment mentality has disappeared. Like the protagonists of Melancholia and Take Shelter, we anxiously await we-know-not-what.

As we do, Pan makes his ever-more-frequent appearances. Franklin Roosevelt is famous for saying: "The only thing we have to fear is fear itself." But fear is a protective mechanism. We are right to fear things that can hurt us and to act accordingly. We cannot solve our problems if we refuse to accept that we have them.

Sometimes Pan is trying to help us by warning us. Sometimes it is possible to hear him playing his flute long before he arrives on the scene. But can we listen and act in some way other than panic?

By Kurt Cobb

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  • Amvet on September 10 2015 said:
    "The recent drop in oil prices is primarily a reflection of slowing demand that comes from a slowing economy.)" Not true. Global oil demand continues to increase by about 1 million bbls per day per year.
  • John L on September 09 2015 said:
    Roy, it's not about “running out of oil” – it’s about the OPPORTUNITY COST of fossil energy. Yes, of course there are alternatives, but they are increasingly expensive (polar, deep-water, sand, shale, methanes, etc.). We entered "economic peak oil" around 2000. That's roughly the date when global oil demand started outpacing low cost global oil supply. From the beginning of the oil age until around 2000, oil was effectively free at a constant $20/bbl in 2011 dollars. But from 2000 -2008, oil prices rose 14% per year, y-o-y. After a brief downturn in 2009, oil quickly returned to trend. But with slower global economic activity, oil price growth was reduced to 8% per year, y-o-y, 2009-2014.

    Today, we’re experiencing an artificial oil glut caused entirely by Saudi and Exxon, for reasons only they understand. Many theories, no solid answers. But such artificial collusion cannot last. Exxon’s CEO recently said the “over-supply will take around 2 years to complete, and then global oil will return to actuarial maximized profits,” somewhere in the range of $75-100/bbl. When oil does return to long trend (2018?), watch for a wicked spike, perhaps into the $200/bbl range, before settling. http://money.cnn.com/2015/02/03/investing/oil-price-rebound-opec-200/

    In 2009, the world was using around 85mb/day. Today, we’re at roughly 94mb/day, and demand continues to grow at around 1.4mb/day/yr. The global population is growing from 7B to 9.5B in the next 30 years. The number of ICE vehicles will increase from around 600M today to roughly 1B in 2040. EVs will become 50% of all new vehicles sold roughly around 2034, but ICE oil demand growth will continue through mid-2040s. Feedstock oil demand will continue to grow for another 30 years (food, medicine, plastics, etc.) until renewables finally displace fossil growth.

    Global oil demand will peak somewhere around 2045 at around 120mb/day (estimates from IEA, EIA, UN, etc.). The net global cost to extract oil will continue to rise on some upward slope, perhaps somewhere between 5-10% per year, largely depending on global GDP. But as the cost of fossils continues to rise, and becomes a greater and greater percentage of economic entry costs, it puts increasing downward pressure on global GDP. This is peak oil theory 101.

    Ignore the “doom and gloom” some write about, but recognize that rising oil prices are a very real noose tightening around the world’s economic growth. Oil and economic activity are effectively the SAME VECTOR. Peak oil has already demonstrably slowed the world’s economic engine (some say rising oil prices were centrally complicit in the 2008 crash). As fossil demand grows, and fossil extraction gets increasingly expensive, the planet will find it harder and harder to prosper. That, in brief, is peak oil.
  • John L on September 09 2015 said:
    Lee, regional oil price transport differentials are small, especially U.S. transport cost on foreign oil. U.S. oil demand peaked around 2005 and long U.S. demand trend is down, as we continue to add to domestic supply. Delivery is not "killing us." The U.S. is actually in a very good position WRT long energy needs.

    In the global picture, yes, demand will continue to rise for decades, as the net global cost of extraction continues to rise as well, leading to a long (year over year) oil price increase. Nobody knows the actual slope, but we do know the direction.
  • Roy on September 08 2015 said:
    Geez I thought it was Brecken writing for a second. Did you actually say anything? So the world was stable from '45 to now? Mars, you mean?

    Dear Peakists, we have about 90 quadrillion barrels of oil equivalent, we call it methane hydrates, it performs equivalently to oil after we adapt our engines, and we know how to produce it economically.

    I wonder if anyone is capable of producing any proof or even near-proof that global warming is even a thing, much less connected fossil fuels? I've read every argument, from every source and it's pretty weak.
  • John L on September 04 2015 said:
    " (The recent drop in oil prices is primarily a reflection of slowing demand that comes from a slowing economy.)"

    I stopped reading at this point. Global oil demand has not been "slowing." Global oil demand has been growing at a fairly consistent rate over the last 4 years, roughly +1.4 mb/day/year, with the IEA currently reporting "strong demand outlook" moving forward. https://www.iea.org/oilmarketreport/omrpublic/

    Over the last quarter, global oil demand has actually been accelerating, perhaps resulting from low oil prices. Oil prices are low because Saudi and Exxon are both grossly over-supplying the market relative to historical norms and seasonal demand. Many theories exist for why they are cutting into their optimized actuarial profit margin. But they are all just theories.
  • Lee James on September 04 2015 said:
    To most Americans today, it does not seem like the end of cheap fossil fuel. If anything, oil seems cheap. The petroleum industry supports the citizen-level view by touting technological breakthrough and new sources of fossil fuel: the very source rock of petroleum. It's as if when we need to, we can drill beneath 10,000-foot deep source rock to find oil in the magma of our planet ....

    Yet to hit home for most Americans is the reality of rising cost of producing the next barrel of oil as Kurt has described. As the U.S. moves from "reservoir oil" -- the stuff of bonanzas -- to scraping the bottom on oil -- the tight-rock formations -- we find ourselves in the position of being the world's highest-cost producer.

    So maybe it's OK that we import about as much as we produce unconventionally?Foreign oil may come us at less production cost, but it's the delivery that kills us. Foreign oil requires US Navy carrier groups to prevent conflict, if not armies on the ground firing guns. Military cost is the obvious cost, but what of the corruption and political intrigue needed to get oil here?

    The delivery cost for foreign oil is a tax on operations that will force oil prices higher world-wide. When delivery cost for imported oil is added to higher domestic production cost, the U.S. is in trouble.

    The future of U.S. oil prices is higher, that is if we can afford to pay higher prices, as Gail Tverberg has seriously wondered about on these pages.

    Bottom-line: We really need to ramp up efforts to develop alternatives to fossil fuel.

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